IRS Correspondence to Taxpayers on Earned Income Credit Recertification

Below is a raw (and likely hideous) rendition of the
original report.
(PDF)

United States
GAO General Accounting Office
Washington, DE. 20648
General Government Division
B-281530
July 30,1999
Mr. John M. Dalrymple
Chief Operations Officer
Internal Revenue Service
Subject: IRS Corresuondence to Taxpavers on Earned Income Credit Recertification
Dear Mr. Dahymple:
We have been reviewing IRS’performance during the 1999 filing season at the request of the
Chairman, Subcommittee on Oversight, House Committee on Ways and Means. As part of
that review, we have been inquiring into IRS procedures for implementing the Earned
Income Credit (EIC) recertification requirement. That requirement provides that taxpayers
who have all or part of their EIC claim disallowed for any taxable year beginning with tax
year 1997 be denied the EIC in future years unless they provide information showing that they
are entitled to the credit. The purpose of this letter is to share our observations on certain
form letters that IRS has been sending to taxpayers in conjunction with this recertification
process. We wanted to share those observations now, rather than wait until we issue our
report on the 1999 Gling season later this year, to give IRS more time to make any necessary
changes to the correspondence before the 2000 filing season.
The observations in this letter are based on our reviews of IRS’EIC-related correspondence
and operating procedures and our discussions with cognizant IRS officials. We did our work
from February through May 1999 in accordance with generally accepted government auditing
standards.
Results in Brief
Some of the correspondence IRS has been sending taxpayers in conjunction with the EIC
recertification process could confuse taxpayers and result in additional burden for taxpayers
and IRS Specifically,
l a letter that IRS uses to tell taxpayers that it has disallowed their EIC claim contains
irrelevant information that could cause taxpayers to not file a claim to which they might be
entitled or to call IRS seeking clarification,
l two letters that IRS uses to correspond with taxpayers who have submitted information in an
attempt to certify their eligibility for the EIC contain inconsistent information on the length of
time taxpayers will have to wait to receive their refunds, and
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B-281530
l a letter and form that IRS uses to tell taxpayers that it needs additional information to verify
their EIC eligibility could burden taxpayers by causing them to send IRS much more
documentation than called for by IRS’operating procedures.
We are recommending changes to the correspondence that, we believe, will avert potential
taxpayer confusion and avoid unnecessary taxpayer burden.
Background
The Taxpayer Relief Act of 1997 included several provisions directed at reducing
noncompliance associated with the EIC. In that regard, the act provided generally that
taxpayers who are denied all or part of the EIC through IRS deficiency procedures’ are
ineligible to claim the EIC in subsequent years unless they provide evidence of their eligibility
through a recertification process. The act also provided for additional restrictions in cases in
which IRS denial of an EIC claim was accompanied by a final determination that the
taxpayer’s erroneous claim was due to either (1) fraud or (2) reckless or intentional disregard
of the rules and regulations. In the case of fraud, the law requires that IRS deny future EIC
claims submitted by that taxpayer for a period of 10 years. In the case of reckless or
intentional disregard of the rules and regulations, IRS is to deny future EIC claims by the
taxpayer for a period of 2 years. After the lo- or 2-year period expires, taxpayers must go
through the recertification process mentioned earlier if they want to claim an EIC.
Irrelevant Information in Letter 3094 Could Confuse Taxpayers
IRS sends letter 3094 to taxpayers after IRS has decided that it cannot ahow the EICs claimed
by the taxpayers because they could not prove that they were entitled to the credit. In the
letter, IRS tells the taxpayer that it will continue to deny the EIC for succeeding years unless
the taxpayer provides information showing that he or she is entitled to the credit, and it tells
the taxpayer what to do to provide that information. IRS letter then contains the following
statement:
“If we determine that an EIC claim is due to reckless or intentional disregard of the law, the law now requiresthat
we deny the credit for two taxable years after the determination. If we determke the claim was due to fraud, the
law requiresthat we deny the credit for ten years after the determination.”
A representative of IRS EIC Project Office told us that the quoted language was included in
letter 3094 as a way of alerting taxpayers to the potential implications of filing erroneous EIC
claims. Although it is important to adequately publicize such information, we do not believe
that letter 3094, which is used to communicate with specific taxpayers about IRS findings
with respect to their specific tax returns, is an appropriate vehicle for such general
communication.
’As defined by IRS, deficiency procedures include administrative procedures, other than procedures related to math or clerical
errors, that result in an assessment of a deficiency in tax.
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B-281530
Taxpayers receiving letter 3094 might be confused by the quoted language, especially since it
is our understanding that the language did not apply to any of the taxpayers who had been
sent this letter as of April 13,1999. As of that date, according to IRS’EIC project office, none
of the EIC claims on tax year 1997 returns that were disallowed through IRS deficiency
procedures (more than 270,000 according to cognizant IRS staff) involved a finding of either
fraud or reckless or intentional disregard of the law.2 In effect, then, all of these claims were
disallowed because the taxpayers could not prove that they were entitled to the credit, which
makes the previously quoted statement irrelevant and potentially confusing.
Taxpayers who receive letter 3094 might believe that the statement in question applies to
them and, as a result, could decide either not to file a claim to which they might be entitled or
to call IRS for clarification. Removal of the previously quoted statement from letter 3094
when the language is irrelevant could alleviate the potential for confusion and thus reduce
the need for taxpayers to contact IRS with questions.
Letters 3177 and 3183 Contain Inconsistent Information
As discussed earlier, taxpayers whose EIC claims in a particular year have been disallowed
are to have any EIC claims in succeeding years disallowed until they provide information
showing that they are entitled to the credit. Taxpayers are to provide that information by
completing Form 8862, Information to Claim Earned Income Credit After Disallowance, and
attaching it to the next tax return they fiIe that claims an EIC. Letters 3177 and 3183 are sent
to taxpayers who have filed a Form 8862. Those two letters contain inconsistent information
that could confuse taxpayers.
IRS uses letter 3177 to teIl taxpayers that it is reviewing their Form 8862. The letter also tells
taxpayers that if IRS determines, after completing its review, that no other information is
required, it will send the taxpayers their refunds within 30 days. IRS may subsequently send
those same taxpayers letter 3183 to tell them that IRS has completed its review of Form 8862
and has determined that the claimed EIC will be allowed. However, contrary to the 30-day
time frame mentioned ‘in letter 3177, letter 3183 tells taxpayers that they will receive their
refunds within 8 weeks (i.e., 56 days). These inconsistent time frames could confuse
taxpayers and be seen by some as IRS reneging on a promise.
Letter 3184 and Form 886 H Are Inconsistent With IRS’
Operating Procedures
Letter 3184 is to be sent to taxpayers when IRS has decided, after reviewing Form 8862, that it
needs additional information. The letter tells taxpayers to send IRS the information and
documents indicated on the enclosed Form 886 H. However, the amount of documentation
’ It was too soon to have any data on the results of IRS’deficiency procedures for tax year 1998 returns (i.e., the returns fled in
1999).
Page 3 GAOKGD-99-112R Earned Income Credit
Et-281530
that taxpayers are asked to send IRS, as listed on Form 886 H, seems much more burdensome
than the documentation required by IRS operating procedures.
In that regard, IRS internal recertification guidelines dated January 27,1999, say that
documentation should only be requested for (1) an EICqualifying child who was claimed and
disallowed for tax year 1997 and is being claimed again for tax year 1998 and (2) an EIC-
qualifying child who was not claimed for tax year 1997 but is being claimed for tax year 1998.
Form 886 H, on the other hand, tells the taxpayer to submit documentation for & EIC-
qualifying child and for & dependent, other than a spouse, listed on the return3 The
documentation to be submitted includes copies of birth certificates and Social Security care
documents, such as school records, to verify that the child lived with the taxpayer; and
documents, such as canceled checks for household expenses or child support payments, to
verify that the taxpayer supported the child.
Thus, for example, if a taxpayer claims two EIGqualifying children (the maximum number a
taxpayer can get credit for) but the eligibility of only one of these children is in question, the
taxpayer is required to compile and submit twice as much documentation as IRS really needs,
according to its internal guidelines. In addition, taxpayers are being asked to submit
documentation not only for their EIC-qualifying children, but also for any other dependent
listed on their return, except for their spouse. Depending on the number of such dependents,
that requirement could cause taxpayers to incur a significant amount of burden in an effort to
compile the necessary documentation.
According to cognizant IRS staff, Form 886 H is worded as it is because otherwise IRS would
have to customize either each letter 3184 or each Form 886 H to specify the qualifying child
for whom the taxpayer needs to submit information-a step that is not feasible. Although we
agree that customizing the letters or forms would not be feasible, there may be other options.
One option IRS might consider is deleting the requirement on Form 886 H that the taxpayer
send in documentation for each dependent listed on the return. That would limit the
requirement to EIC-quahfying children, which would be more consistent with IRS
recertification guidelines.
Recommendations to IRS’Chief Operations Officer
To avert potential taxpayer confusion and avoid unnecessary taxpayer burden, we
recommend that IRS take the following actions:
l Revise letter 3094 by either (1) making the paragraph relating to reckless or intentional
disregard of the law and fraud an optional paragraph to be used only when it is relevant; (2)
restricting letter 3094 to cases that do not involve reckless or intentional disregard of the law
or fraud, thus negating the need to ever use the paragraph in question, and devising a
separate form letter for taxpayers whose EIC claims are disallowed for those reasons; or (3)
’ Because of differences in the criteria for detenninin g whether a person is a dependent or an EICquaWying child, a person can
have dependents who are not EICquaMying children and vice versa.
Page 4 GAO/GGD-99-112R Earned Income Credit
B-281530
rewording the paragraph to make it clear that it does not apply to the spetic audit finding
covered by the letter but is being provided to alert taxpayers to the potential consequences if
they continue their noncompliant behavior.
l Revise letter 3177 and/or letter 3183 so that consistent refund issuance time frames are cited
in both letters.
l Make the documentation requirements in letter 3184 and Form 886 H more consistent with
the requirements in IRS’internal recertification guidelines.
Agency Comments and Our Evaluation
IRS Chief Operations Officer commented on a draft of this report by letter dated July 7,1999
(see enc.). He agreed with our recommendations and said that the related form and letters
would be revised.
With respect to our first recommendation, the Chief Operations Officer noted that the
paragraph relating to reckless or intentional disregard of the law and fraud had been included
in letter 3094 to “ensure that the taxpayer is aware of all the rules and regulations regarding
EIC.” Recognizing the potential educational value of this information, we have revised our
recommendation to include a third option that IRS might consider in revising letter 309”
rewording the paragraph in question to make it clear that it does not apply to the specific
audit Snding covered by the letter but is being provided to alert taxpayers to the potential
consequences if they continue their noncompliant behavior.
In commenting on our last recommendation, the Chief Operations Officer said that changes
to letter 3184 and Form 886 H will require some computer programming modifications, which
will not be completed until fiscal year 2001. In the meantime, pen and ink changes will be
made to Form 886 H when appropriate. That action would be responsive to our
recommendation.
We are sending copies of this report to Representative Bill Archer, Chairman, and
Representative Charles B. Rangel, Ranking Minority Member, House Committee on Ways and
Means; Representative Amo Houghton, Chairman, and Representative William J. Coyne,
Ranking Minority Member, of the Committee’s Subcommittee on Oversight; and Senator
William V. Roth, Jr., Chairman, and Senator Daniel P. Moynihan, Ranking Minority Member,
Senate Committee on Finance. We are also sending copies to the Honorable Lawrence H.
Summers, Secretary of the Treasury, and the Honorable Jacob Lew, Director, Office of
Management and Budget. Copies will be made available to others on request.
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If you have any questions, please call me or David Attianese at (202) 512-9110.Key
contributors to this letter were Doris Hynes, John Lesser, and Susan Mak.
Sincerely yours,
Cornelia M. Ashby
Associate Director, Tax Policy and
Administration Issues
Page 6 GAOKGD-99-112R Earned Income Credit
Enclosure
Comments From the Internal Revenue Service
DEFARTMENT OFTHE TREASURY
iNTERNAL REVENUE SERWCE
WASHINGTON. D.C. 20124
July 7. 1999
Ms. Comelia M. Ashby
Associate Director, Tax Policy
and Administration Issues
U.S. General Accounting Oftice
441 G Street, NW
Washington, D.C. 20515
Dear Ms. Ashby:
Thank you for the opportunity to review the draft letter report entitled “IRS
Correspondence to Taxpayers on EIC Recertification.” The report contained three
recommendations dealing with the form letters sent by the IRS when working
Recertification cases. Since this is the first year of the program, we expect to go
through some growing pains. Therefore, we appreciate any comments relating to the
Recertification program.
RECOMMENDATION
Revise Letter 3094 by either (1) making the paragraph relating to reckless or intentional
disregard of the law and fraud an optional paragraph to be used only when it is relevant
or (2) restricting Letter 3094 to cases that do not involve reckless or intentional
disregard or fraud, thus negating the need to ever use the paragraph in question, and
devising a separate form letter for taxpayers whose EIC claims are disallowed for those
reasons.
COMMENTS
We appreciate your concern that the paragraph relating to reckless and intentional
disregard may be confusing to taxpayers. We included that paragraph to ensure that
the taxpayer is aware of all the rules and regulations regarding EIC. We will revise the
wording of Letter 3094 considering the issues you raised and the appropriateness of
the language.
RECOMMENDATION
Revise Letters 3177 and/or 3783 so that consistent refund issuance time frames are
cited in both letters.
COMMENTS
We agree that Letters 3177 and 3184 need to be revised. Both Letters 3177 and 3183
will be automated for fiscal year 2000. The entire wording of the letters is in the
process of being revised. Refund issuance time frames will be consistent.
Page 7 GAO/GGD-99-112R Earned Income Credit
Enclosure
Comments From the Internal Revenue Service
2
RECOMMENDATION
Make the documentation requirements in Letter 3184 and Form 8661-1 more consistent
with the requirement in IRS internal Recertification guidelines.
COMMENTS
We agree with the recommendation that both letters need to be revised for
Recertification cases. Changes to the letters will require some programming
modifications. Program changes submitted now will not be completed until fiscal year
2001. In the meantime, we will make pen and ink changes to Form 886H when
appropriate.
If you have any questions, please call Floyd Williams, National Director, Legislative
Affairs, at (202) 622-3720.
Page 8 GAO/GGD-99-112R Earned Income Credit
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